Do it yourself

Wednesday, November 23, 2016

Cash is colorless, it takes color of the hand that is holding it

Thought for the day

"In the spring, at the end of the day, you should smell like dirt."

—Margaret Atwood (Canadian, 1939)

Word for the day

Ripsnorter (n)

Something or someone exceedingly strong or violent, e.g., a ripsnorter of a gale.

Malice towards none

From "Har Har Modi" to "Et tu Modi"; from "Great Expectations" to "Great Betrayal"; from "Divine Intervention" to "Ruthless Tuglaq" - the spring to autumn cycle is complete in two and half year.

Where do we go from here?

First random thought this morning

Economic reforms often mean transformational changes that may not necessarily lead to immediate rise in corporate profitability and aid in resource grabbing.

On the other hand these usually do lead to lesser protection, more competition, stricter compliance standards and larger accountability for businesses.

If you do not want to pay taxes, cost of compliance and market linked compensation for exploitation of natural resources and labor, clamoring for economic reforms would not yield much.

Cash is colorless, it takes color of the hand that is holding it

As I mentioned last Friday (see here), I totally disagree with the prognosis that the demonetization of HDNs by the government will severely hurt the real estate sector in the country.

I feel the sector that has been undergoing an overhaul since past few year will get a great impetus from the demonetization drive.

The arguments suggesting a collapse in the real estate market suffer from a multitude of wrong assumptions. For example, it appears to assume that—

(a) The pricing of real estate in India is predominantly a function of "cash component" involved in the deal.

(b) The demand for housing, commercial complexes (malls etc.) and office space is mostly discretionary and could be deferred/suppressed for a considerable period of time.

(d) A large part of the real estate stock is in the hands of financial investors who are all leveraged and stressed.

In my view, these assumption may not be completely fair. Property prices are usually a function of cost of land & construction, affordability (income and saving rate of the target buyer group) rental yields vs. mortgage rates. Black cash is only a top up and deterrent to fair price discovery.

In my view, the latest developments like (a) changes in laws relating to land acquisition; (b) regulation of real estate sector; (c) rising trend in urbanization; (d) rising demand for urban commercial real estate as self-enterprise accelerating; (e) rising growth in organized retailing; (f) need for development of logistic infrastructure (warehousing etc.) to reap the benefits of GST; (g) changes in regulation relating to foreign investment in real estate sector and institutionalization of real estate ownership (through REIT etc.) - are majorly positive for the real estate sector in India.

A significant impetus should be provided to the real estate demand by (a) rising affordability through higher income (e.g., pay commission, rise in minimum wages); (b) falling trajectory of mortgage rates; (c) consolidation of real estate development business through elimination of smaller, inefficient and weaker developers from the market; (d) better town planning under smart city initiative.

All cash component in real estate deals in not black (illegal or unaccounted money). Many a times home buyers are forced to withdraw cash from bank accounts to pay to the seller as seller does not want to pay tax on gains or he needs to pay cash to seller of the property he is buying in lieu of the property he is selling.

In the worst case, assuming 50% average cash component in the deal, it would be 18% higher cost for the buyer (15% tax on 50% cash component @30% and 3% higher stamp duty @6%) and 10% higher tax for the seller (@20%). If both buyer and seller have to share the cost equally, a 5% price correction should be sufficient....to continue

Tuesday, November 22, 2016

Don't underestimate the power of a common man

Thought for the day

"Once you publish a book, it is out of your control. You cannot dictate how people read it."

—Margaret Atwood (Canadian, 1939)

Word for the day

Incipient (adj)

Beginning to exist or appear; in an initial stage, e.g., an incipient cold.

Malice towards none

In twelve days of demonetization drive, the government must have found that it's not all Black & White. There are more than fifty shades of grey in Indian economy!

First random thought this morning

The execution of demonetization process since 8th November, and the rail accident near Kanpur last Sunday have made one thing amply clear - 'Planning' is something we are still not used to. The following five simple steps could have made the demonetization a relatively painless step:

1. Print new notes equivalent to at least 50% of old currency in advance. Double credit limit of all Kisan Credit Cards for three months.

2. Announce demonetization on the night of 28th of October or Nov. Provide enough cash to all bank Branches on 29th with instructions to all employers to withdraw enough cash to pay salaries on 30th in cash.

3. Announce one week holiday for schools. Deploy all teachers, Aadhar enumerators, and Banking Correspondents to go door to door with biometric devices and exchange 2k-4k cash. Each person covering 100 households every day. (Pulse polio volunteers have done this often)

4. Open 24*7 cash exchange counters at all police stations, & other civic offices; besides the facilities at bank branches and ATMs.

5. Engage all market associations for exchanging valid cash of their members with appropriate disclosures and undertakings.

Don't underestimate the power of a common man

Many highly learned fund managers, analysts, strategists, economists, and market observers have commented adversely about the demonetization of HDNs by the government. One famous fund manager has likened it to a running car (Indian economy) crashing into a wall. A very popular strategist with a brokerage house sees FY17 GDP growth rate falling to 3.5%. One popular economists and a regular weekend columnist finds it an exercise in futility. A global analyst of Indian origin finds it unprecedented in annals of global economic history; counterproductive and hence completely undesirable.

I have no issues with none of these experts. But my faith in the adaptability of fellow Indians to the change remains unflinching. I see no chance of trade disruptions due to demonetization lasting beyond 2-3months. There is no denying that the GDP of FY17 could be somewhat impacted. But I do not see any impact of this beyond this.

I would like to cite the following five examples in support of my view:

(a) Till 1994, the stock trading in India was done on the floor of stock 20 odd exchanges. The stock brokers were usually not professionally qualified & trained. OTCEI experiment had mostly failed. The clearing & settlement process of stocks was cumbersome, constricting, unsecured and totally non-transparent. NSE took off as BSE closed for two days due to MS Shoe fiasco. In next 3yrs India was the first country in the world to have 100% electronic trading. All dhotiwalla brokers were well trained in computers. Professionals were inducted as new members by the elite club called BSE. All floor boys (jobbers, market makers, traders, etc.) and many more got better employment.

(b) The doubts were cast on viability of Indian stock markets after trading in dematerialized stocks was introduced in late 1990s. All experts opined that since a majority of stocks are held as black money, no one would want it to be dematerialized and open up for scrutiny. Within 3years India became the first country to have 100% dematerialized trading. Everyone knows the story of capital market growth after that.

(c) With Rs18/min for incoming call in 1995, many wrote the epitaph of Indian mobile telephony industry even before it opened its eyes. Even in 2003, most optimistic investors were estimating two decades for full penetration. People were skeptic how the illiterate villagers will adopt to the technology and English. India achieved near full penetration in no time. I need not say anything further on this.

(d) Alarmed by the air pollution, in 2002 the Supreme Court ordered all public transport vehicles in Delhi to be run on CNG. There was utter chaos. The State Government tried it best to subvert the SC order. Bus, auto and taxi operators struck work. There were maddening queues in front of CNG pumps. But within one year the city was proud to win the US Department of Energy’s first ‘Clean Cities International Partner of the Year’ award in 2003 for ‘‘bold efforts to curb air pollution and support alternative fuel initiatives.’

(e) In 2003, the then home minister L. K Advani announced launch of a pilot project to issue Multi-purpose National Identity Card Project (MNIC) in a few selected sub-districts in various districts of 13 States namely Jammu & Kashmir, Gujarat, Uttranchal, Rajasthan, Uttar Pradesh, Assam, Andhra Pradesh, West Bengal, Tripura, Goa, Tamil Nadu, Pondicherry and Delhi.

Many (including the one economist mentioned at the begining of this post) saw this as a communal agenda aimed against Muslim and illegal Bangladeshi immigrants. The project was promptly abandoned by the UPA government as unfeasible. But six years later in 2009, the UPA government launched the UIDAI, which started issuing Aadhar ID cards in 2011. In less than 5years, over 85% population has an multipurpose ID card that is being efficiently used for opening bank accounts, taking mobile telephone connections, direct transfer of subsidies etc.

All the above five cited developments that sought to change the status quo were seen as financially unviable and causing avoidable inconvenience. The success and benefits are there for everyone to see.

I do not see any reason, why the demonetization shall not result in a revolutionary change in the ways of doing business in India.

One, adoption of electronic payment methods will not only accelerate the efficiency of smaller businesses and trade; it will also enhance security, scalability and their compatibility with larger businesses.

Two, with materially higher money multiplier in place, the economy may get the big push it has been looking for.

Three, everyone had been expecting better compliance standards with implementation of GST. This move may only prepare people in advance for whole hearted adoption of GST.

Four, those ruing the inconvenience to the people may please note that in past 30years, Mamta Banerjee and CPM have organized thousands of Bandhs in West Bengal. These Bandhs caused irreparable loss to the daily wage earners for three decades. The likes of JDU, AAP and Shiv Sena have also caused similar disruptions on many occasions.

Five, insofar as rural economy is concerned, (a) the media reports about rural distress due to demonetization are highly exaggerated; (b) Two years of drought did not impact GDP by more than 50bps. Real estate is down for past three years at least. How come demonetarization will cause 4% dent in the economic growth?

I am actually worried about the worsening global economy. Rising US yields and USD, collapsing CNY and trade are indicating towards a season of deflation - irrespective of Trump, Demonetization or Brexit.

These three in fact, I see as saviors for the global and Indian economy. Amen!

Friday, November 18, 2016

Sir, I beg to differ

Thought for the day

"It is a golden maxim to cultivate the garden for the nose, and the eyes will take care of themselves."

—Robert Louis Stevenson (Scottish, 1850-1894)

Word for the day

Pleonasm (n)

The use of more words than are necessary to express an idea; redundancy, e.g., Free Gift or True Fact.

Malice towards none

Politician hoping that the inconvenience caused to common people by demonetization will reflect in 2019 elections will do better if they recall that people forgot trauma of emergency in less than three years and reelected Mrs. Indira Gandhi with thumping majority.

First random thought this morning

Three key learnings from four hour trip to the town to assess the reaction of common people to the demonetization move:

1. A large number of common people are looking for a sense of purpose in their life. They no longer want to live like insects. This move has certainly stroked that sense in them. Many termed the wait in long queues as their contribution to the nation building.

2. Though most politicians claim to have risen from the lowest ranks in the society - their actions and reactions suggest a total disconnect. The preparation for demonetization suggest that PM and his team are no exceptions.

3. If demonetization is not followed by some tangible welfare schemes to give effect of wealth transfer, politically it may boomerang on BJP.

Sir, I beg to differ

In past one week or so, a number of experts have expressed their views on the effect of demonetization on various sectors and highlighted the opportunities and threats that may emerge out of it.

The consensus certainly seems to suggest that the real estate sector will be hit the hardest. Besides, this move is also expected to the consumption, especially the discretionary consumption, at least over next two quarters. The trade disruption caused by currency shortages could have ripple effect and impact almost every other sector.

On the other hand banks and NBFCs are mostly seen as gainers from the move as the move is expected to lead to transfer a material part of informal sector financial transactions to the formal sector; besides higher use of services like credit card and e-wallets (commonly referred to as 'plastic money'). Though there are concerns that in next couple of quarters the stress in the personal loans and MSME sector credit could rise.

Without getting into the popular views, I may share my subjective views by the readers. As these views are based on my personal assessment of the situation, these may suffer from my socio-economic prejudices and poor knowledge of finance.

I believe that demonetization of HDNs per se brings little change in the financial system. The market disruption is temporary and may not last beyond 2-3months. The ripple effect may also be limited to 4QFY17 and not beyond. Moreover, the effect of disruption would seen mostly in the unorganized sector.

Insofar as consumption demand is concerned, the demand for non-durable and staples could suffer for two months. After all, if I do not drink alcohol today, I usually would not drink double the quantity tomorrow.

The demand for durable goods however may just get deferred to FY18. It is pertinent to note that demand for motor cycle, smart phone, washing machine, water heater, etc. is no longer luxury for a large segment. It is rather becoming a necessity. A rise in tax-compliance will make at least 20mn more people eligible for higher bank credit at a time when rates may be moderating.

I therefore see the opportunity in consumer financing sector becoming even more attractive from structural growth viewpoint. Though the people who are looking for immediate gains may be subject to disappointment.

The largest opportunity I see is in the real estate sector. I mostly disagree with the prognosis that reduction of black money stock in the system will lead to material correction in real estate prices.

I believe that the sector is already going under an overhaul. In the process a large majority of smaller, inefficient and unorganized players are getting eliminated from the business. Demonetization may just accelerate the consolidation process. I see massive consolidation with 4-5 large players remaining relevant in each market....to continue next week

Thursday, November 17, 2016

Mistrust & Unpredictability

Thought for the day

"The Devil, can sometimes do a very gentlemanly thing."

—Robert Louis Stevenson (Scottish, 1850-1894)

Word for the day

Manna (n)

Any sudden or unexpected help, advantage, or aid to success.

Malice towards none

UP government, in contemptuous defiance of the Central Government notification, has declared that they will accept land registration fee in currency that is no longer legal tender.

Does this tantamount to sedition?

First random thought this morning

Many Indians who sounded like ardent devotees of PM Narendra Modi before 2014 Lok Sabha elections, are literally abusing and cursing him. Even some Gujaratis who cheered him at Madison Square in New York, are regretting their enthusiasm.

On the other hand, the world leaders who treated him like a pariah during 2002-2014, are embracing him like no one.

I ask - who was wrong about PM Modi before 2014 and who is wrong now?

Mistrust & Unpredictability

Indubitably, the demonetization of HDNs may go down as a watershed event in the India's economic history; that is even if the experiment fails

Beyond trade disruption and demand deferment for few months, it could bring some lasting changes to the economic behavior of the Indian consumers and businessmen.

This may provide some good opportunities to the investors. Assigning any more importance to this event at this point in time may not be relevant.

As I suggested yesterday (see here), the main challenge in formulating an appropriate investment strategy today is to incorporate the rising "mistrust and unpredictability" in the overall economic environment.

In an environment where the policy direction is totally unpredictable and you cannot trust, amongst other things —

· the commitment of politicians to their ideologies and long stated policy stance on even core issues;

· the experts' opinions about the socio-economic trends;

· corporate governance standards of most reputed companies;

the investment strategy, for a small investor like me, must include the following five doctrine, even if it makes the strategy little dogmatic:

1. The companies with business model that relies heavily on the policy arbitrage are to be totally avoided.

2. The companies that enjoy valuation premium based on the legacy of promoters should be adequately discounted.

3. The discount on the commitment of politicians to a particular ideology or policy stance should be raised to a minimum of 50%.

4. All expert opinions must invariably be backed by self assessment. In cases where self assessment is not possible, equal reliance should be placed on experts' views and traders' positions (fundamental and technical analysis).

5. Let your imagination run wild in making investment assumptions, leaving almost nil scope for a black swan event.

From the recent utterances of PM Modi, PM May, Chancellor Merkel, President designate Donald Trump, etc. it is clear to me that the global trade order is due for a reset. In my view, therefore, overwhelming the investment strategy by demonetization impact may tantamount to missing the forest for trees.

Tomorrow, I shall share the opportunities (and threats) I see due to demonetization.

I promise to share my updated investment strategy before end of this year.

Wednesday, November 16, 2016

Worrisome & encouraging

Thought for the day

"There is only one difference between a long life and a good dinner: that, in the dinner, the sweets come last."

—Robert Louis Stevenson (Scottish, 1850-1894)

Word for the day

Anathema (n)

A person or thing detested or loathed.

A person or thing accursed or consigned to damnation or destruction.

Malice towards none

Pak army claiming causalities and transgression on their sides and India rubbishing the claims with contempt.

The life comes full circle.

First random thought this morning

It is unfortunate that the government has to restore to "Marking" the people who have availed the one time facility of currency exchange.

This highlights the existence of wide trust deficit and continuing game of cat & mice between the establishment and the public.

The worst part - it is again the poor who is being used to further the interest of the non-compliant, to the detriment of the cause of poor in general.

The consolation is that this time the poor have (so far) not played the game with opposition parties which are trying to engineer riots by inciting the poor to advance their vested interests.

Worrisome & encouraging

Mistry, Modi and Trump have hit the Indian equity markets hard. The erosion in equity prices has been swift and material. Inarguably, there is a sense of disbelief and bewilderment amongst market participants.

As an investors I am naturally inclined to look for opportunities in the mayhem; and I already see some investment opportunities emerging. Though I am not too excited as yet. I am preserving some cash (20%) for even better opportunities that may emerge in next month or so.

But before I share my thoughts of the emerging opportunities, I find it pertinent to put the context in, what I believe is the right perspective.

Mistry episode has yet again challenged the faith of investors in the corporate governance standards in the country. After the AV Birla group announced group restructuring a few months back punctured the faith of investors, the Tata feud has widened the whole considerably.

· The corporate governance premium on Tata group companies and others like Infosys et. al. is vanishing fast.

The Army supported by the Narendra Modi led political establishment made first ever and most audacious official admission of the surgical strikes on PoK based terror camps. PM Modi followed the move by demonetization of high denomination notes (HDNs).

· These steps and political utterances after these events have completely demolished the predictability of policy. So much so that the defense minister brought the "no first use" nuclear doctrine under clouds; and tax officials are openly talking about retroactive amendment of penal provisions of IT Act to impose penalty on disproportionate rise in income declaration post demonetization of HDN.

The mostly unexpected victory of Donald Trump, after a surprising Brexit verdict in June this year, should challenge the confidence of policy makers and investors who rely on "experts" to gauge the mood of the public and socio-economic realities on the ground level; besides of course highlighting a perceptible shift in the public opinion.

· The two largely unexpected events have highlighted the widening chasm between the public opinion and the elite group that has been so far considered "opinion maker". The natural outcome of these has to be rising mistrust

The rising unpredictability and mistrust in the social order, and consequentially in the market place is worrisome as well as encouraging.

Worrisome, in the sense that it may deepen the chaos in the socio-economic sphere.

Encouraging in the sense that it will precipitate the corrective action and lead to emergence of a more robust socio-economic order.

...to continue tomorrow.

Friday, November 11, 2016

Be careful in what you wish for

Thought for the day

"Do the best you can, and don't take life too serious."

— Will Rogers (American, 1879-1935)

Word for the day

Syncretism (n)

The attempted reconciliation or union of different or opposing principles, practices, or parties, as in philosophy or religion.

Malice towards none

People who found 45% tax under IDS prohibitive, are now pleading with government to take 50% and let them account for their hitherto unaccounted cash!

First random thought this morning

The opposition parties, especially Congress and CPI-M are making the most puerile comments on the step to demonetize high denomination notes (HDNs). The argument of inconvenience to daily wage earners coming from Rahul Gandhi & Prakash Karat's mouth is most preposterous.

They are the people who organized maximum bandhs in the country. It is only in the past one decade that people have understood their game and stopped responding to their bandh calls.

The Congress and SP are perhaps responsible for most curfews in the country. The arguments made by P. Chidambaram, who is most responsible for complicating the tax compliance procedures, are clearly pervert.

Be careful in what you wish for

"May you get what you wish for", is one of the three popular Chinese curses. It cautions people to be careful in what they wish for; because they might just get what they wished for and realize that the thing they desired is not what they actually wanted.

Persistently chiding PM Modi to fulfill his election promise of recovering black money from the rich and putting them in the account of poor, the opposition leaders would have never imagined that their this wish may actually come true - that too so soon.

One is hearing numerous stories about how the cash rich people are distributing their unaccounted money to the poor. A builder in Varanasi reportedly has given away 2.5cr worth of 500-1000 notes to street dwellers over night.

Many people are renting the Jan Dhan bank account of their servants & their family members, by promising to share as much as 20% of the cash deposited in such accounts. There are many reports suggesting that people have approached poor farmers to help them in converting the color of their black money. Taking advantage of good monsoon, a farmer can show higher than usual income this year and deposit the money in their bank account.

Redistribution of wealth on such a massive scale is unprecedented. The steps like abolition of privy purse, nationalization of banks, insurance companies and coal miners, etc. all resulted in transfer of money from select rich to the government. Education cess might have enabled the government to fund the education of poor kids. But this is as direct a transfer as it could be - Rich people eager to share their wealth with poor directly and apologetically!

Assuming that the government may have sounded BJP and NDA allies to go light on cash, the opposition parties are the biggest victims of this masterstroke. PM Modi has made them pay for his promise of wealth transfer.

The equity market is worried about the impact of demonetization on consumption. I find the fear somewhat misplaced. Though consumption may indeed suffer for few months, it would be much higher next year as the propensity to consume is much higher at the lower quartile of the pyramid where the redistributed wealth will find shelter. A lighter balance sheet of RBI (assuming 20% reduction in currency stock), may provide space for larger public sector spending and lower rates.

Moreover, those arguing for a midterm decline in consumption may be mistaking washing machines, motorcycles, smart phones, TV, etc. for discretionary items. Trust me these are no longer discretionary items in most cases. Those who are not able to buy in cash will buy on credit.

At last, in my view, the government should make this demonetization process constitutional. All HDNs should be mandatorily demonetized every 10years to effectively control of menace of black money without any inconvenience to the common man.

Thursday, November 10, 2016

Cashless in Great Mall of India

Thought for the day

"Too many people spend money they haven't earned to buy things they don't want to impress people they don't like."

— Will Rogers (American, 1879-1935)

Word for the day

Circumspect (adj)

Watchful and discreet; cautious; prudent, e.g., circumspect behavior.

Malice towards none

Mahatma Gandhi shows his power to the ungrateful nation.

He takes a break of three days o change his attire and all the detractors are on their knees.

First random thought this morning

In his victory speech, Donald Trump looked nothing like the Trump who was engaged in a long bitter, filthy presidential campaign.

He struck all the reconciliatory notes to sooth the nerves of dissenting republicans and opposing democrats.

The economic, financial and market commentators should soon come around and dilute their prophecies of an impending disaster.

Cashless in Great Mall of India

Past two days so much has happened. First on Tuesday evening PM Modi struck hard on the black money abolishing about 85% of the currency notes in circulation (in value terms). Then on Wednesday, Republican Donald Trump trounced the Democrat Hillary Clinton, to shock the poll pundits. Republicans also secured majority in both the houses of the US Parliament, making Trump one of the strongest presidents in recent decades.

I must admit that I am too lazy to call Trump's triumph and Modi's strike on black money earth shattering events requiring a major change in my position. Nonetheless it does necessitates blinking eyes few more times and perhaps changing the side.

First of all, let me tell you that I am stranded cashless in the Great Mall of India; and trust me I am not alone. There are millions like me - wandering around aimless with no money in pocket. My banker informed me that wait for three days and we will provide you with crisp new notes and things would be perfectly normal. However, when I tried to pass this message on to some of my acquaintances, I was ridiculed like never before. The angry voices told me that —

· Large traders are left with virtually no working capital. The visibility of recovery of goods sold on credit is seriously clouded, as the buyers are already invoking force majure.

· Consumers are also struggling to dispose off high denomination notes (HDNs) they have been holding to spend in near term. Many of them do not want to deposit the papers in banks for the fear of persecution by tax authorities, whom they refused to oblige by declaring in IDS.

· Most small contractors are busy reworking the project costs, if they have to pay service tax on all services used and VAT on all inputs. This extra cost may not be claimed under escalation clauses.

· Most political parties in UP (except BJP) had accumulated the cash required for election related expenses, as they were planning to formally launch campaigns from 11th November (Dev Probdhini Ekadashi) when the inauspicious four months (Chaumasa) ends. They would find it hard to return this cash and get the new one in time for elections.

Look at the irony, Modi Ji has hit the opposition hardest where it hurt the most, but no one can cry. rather they are forced by media to smile and sing praise for the government!

· A large number of brokers and financiers were funding the stock & commodity market transactions in cash. These brokers and financiers are in trouble, as they face defaults from the traders. They would need to liquidate all the position immediately. The losses could be material in cases where the underlying is illiquid mid and small caps stocks. 50-75% price erosion in these stocks may not be exceptional.

· My daughter was saving the HDNs received on Diwali and Bhai Dooj for Christmas vacation. She is quite upset to part with that money as it would need to be deposited in bank account. No trust in money matters!...to continue tomorrow